Succession planning involves anticipating how you'll turn your business over to someone else when you retire. A good succession plan will also anticipate what should happen if you die unexpectedly or if you suffer an injury or illness that prevents you from running your operation. How you go about succession planning depends on whether your business is family-run or if you have partners.
Choose Your Successor
If your business is a sole proprietorship, you might have more options than if it's a partnership. Typically, you can hand over control of your sole proprietorship to whomever you like. However, successful planning involves determining if that individual is willing and able to take on the job. You can pass your business through a will when you die. Passing your business through a trust protects it if you become incapacitated. If you're planning retirement, you can enter into a buy-sell agreement with the individual you've selected, such as a relative or employee, prior to stepping down.
Consider the Effects on Taxes
Turning your business over to someone else often results in a tax bill coming due. There are strategic ways to avoid this. If you gift your company to your chosen successor gradually, over time, you can avoid estate taxes, provided that you don't die before you've completed the process. However, gift tax laws have dollar limitations per year. Speak with a tax lawyer if you're considering giving your business away during your lifetime.
Buy-Sell Agreements Are Standard for Partnerships
If your business is a partnership, it's important to create a buy-sell agreement as part of the formation process. Buy-sell agreements can contractually arrange for your partner or partners to step in and assume full ownership of the business if something should happen to you. Buy-sell agreements can be mandatory, where your partners must buy out your portion of the business from you or your heirs. They can also be optional, where your partners have the first right to purchase your share. If they decline to do that, they can find another buyer. It's important that the terms of your will or trust are consistent with the agreement.
Review Your Plan Periodically
No matter what method you choose to pass on your business, it's important to review your plan every year or two. The son or daughter you chose to take over might have developed new interests. Heirs may predecease you, employees can quit, and partnerships can develop problems. You can make changes to your plan at any time. It's usually not final until you become incapacitated or die.
A Business Lawyer Can Help
The law surrounding succession planning is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.